Accounting Theory Exam Review
Course Introduction
Accounting Theory explores the fundamental principles, concepts, and frameworks that underpin modern accounting practices. This course examines the historical development and philosophical foundations of accounting, analyzing how accounting standards evolve and their impact on financial reporting. Students will critically evaluate various accounting theories, including positivist and normative approaches, and their influence on standard-setting, ethics, and decision-making within organizations. Topics covered also include stakeholder perspectives, the conceptual framework of accounting, and the role of regulation and professional judgment in financial disclosures. The course aims to equip students with analytical skills to assess the rationale and implications behind accounting policies and practices.
Recommended Textbook
Intermediate Accounting 9th Edition by J.
David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) What is the EITF and what is its purpose?
Answer: The Emerging Issues Task Force (EITF) acts as a filter for the FASB. It includes 15 individuals from public accounting and private industry along with a representative from the FASB and an SEC observer. The task force focuses on emerging issues and attempts to reach a consensus, speeding up the standard-setting process.
Q2) CPAs are licensed by:
A) The AICPA.
B) The SEC.
C) The federal government.
D) State governments.
Answer: D
Q3) Independent auditors express an opinion on the:
A) Fairness of financial statements.
B) Accuracy of financial statements.
C) Soundness of a company's future.
D) Quality of a company's management.
Answer: A
Q4) Compute the cash balance at the end of the first year for Tri Fecta.
Answer: 11ee8885_a80a_ecd4_91cb_4bd94c97ce97_TB2599_11
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Adjusting entries are primarily needed for:
A) Cash basis accounting.
B) Accrual accounting.
C) Current value accounting.
D) Manual accounting systems.
Answer: B
Q2) When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect?
A) An adjustment for depreciation reduces net income.
B) A decrease in salaries payable decreases net income.
C) A reduction in prepaid expenses decreases net income.
D) An increase in accrued payables decreases net income.
Answer: B
Q3) The income statement summarizes the operating activity of a firm at a particular point in time.
A)True
B)False
Answer: False
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4
Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) Intangible asset
A)Obligations payable in more than one year or longer than the operating cycle.
B)Includes buildings and land used in operations.
C)Obligations payable within one year or the operating cycle.
D)Ownership of an exclusive right.
E)Items expected to be converted to cash or consumed within one year or the operating cycle.
Answer: D
Q2) Liquidity
A)Also know as the quick ratio.
B)Current assets divided by current liabilities.
C)Refers to riskiness of a company with regard to the amount of liabilities in its capital structure.
D)Relates to the amount of time before an asset is converted to cash or a liability is paid.
E)If four to one, 80% of assets are debt-financed.
Answer: D
Q3) Altoid Co.'s debt to equity ratio. Round your answer to two decimal places.
Answer: ($450 + 600) /$(150 + 1,000) = .91 Debt to equity ratio
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Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Q1) The multiple-step format of the income statement reports a series of intermediate subtotals such as gross profit, operating income, and income before taxes.
A)True
B)False
Q2) Required: Prepare a 2018 single, continuous statement of comprehensive income for Kroeger Inc. Use a multiple-step income statement format.
Q3) Required: Prepare a 2018 separate statement of comprehensive income for Rollins Inc.
Q4) In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a restructuring charge but said it expects to see earnings growth in its fiscal second through fourth quarters." The New York skin care and cosmetics company reported a net loss of $25.4 million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4 million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9 million, or 32 cents a share, the company said profit would have been $51.5 million, or 19 cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.
Q5) Its inventory turnover ratio for 2018. Round your answer to one decimal place.
Page 6
Q6) Required: Compute the inventory turnover ratio for 2018. To view all questions and flashcards with answers, click on the resource link above.
Chapter 5: Revenue Recognition
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Q1) Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:
A) Installment sales method.
B) Point of sales method.
C) Cost recovery method.
D) Installment sales method or cost recovery method.
Q2) In its 2017 year-end balance sheet, Reliable would report installment receivables (net) of:
A) $20,000.
B) $35,000.
C) $25,909.
D) $10,000.
Q3) In 2017, Reliable would recognize gross profit of:
A) $0.
B) $25,000.
C) $8,090.
D) $8,333.
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Chapter 6: Time Value of Money Concepts
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Q1) Sondra deposits $2,000 in an IRA account on April 15, 2018. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2028?
A) $20,600.
B) $20,928.
C) $23,616.
D) $24,715.
Q2) Provide two examples of the use of present value techniques in accounting.
Q3) Briefly explain how you would arrive at the monthly payment for a 48-month loan where the first payment is due one month from the loan date. In your explanation, include the use of present or future value tables.
Q4) Shelley wants to cash in her winning lottery ticket. She can either receive eight $100,000 semiannual payments starting today, or she can receive a single-amount payment today based on a 6% annual interest rate. What is the single-amount payment she can receive today?
A) $853,020.
B) $801,969.
C) $744,090.
D) $1,293,794.
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Chapter 7: Cash and Receivables
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Q1) Alliance Software began 2018 with accounts receivable of $115,000. All sales are made on credit. Sales and cash collections from customers for the year were $780,000 and $700,000, respectively. Cost of goods sold for the year was $450,000. What was Alliance's receivables turnover ratio (rounded) for 2018?
A) 4.00.
B) 5.03.
C) 2.90.
D) 6.78.
Q2) Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so.
A)True
B)False
Q3) COSO defines internal control as a process, affected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in:
A) Effectiveness and efficiency of operations.
B) Reliability of financial advice.
C) Compliance with local ordinances.
D) All of these answer choices are correct.
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Chapter 8: Inventories: Measurement
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Q1) Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2018, when it had an inventory of $800,000. Its inventory as of December 31, 2018, was $811,200 at year-end costs and the cost index was 1.04. What was DVL inventory on December 31, 2018?
A) $780,000.
B) $800,000.
C) $811,200.
D) $832,000.
Q2) Specific identification method
A)Not feasible for many types of products.
B)Not required to correspond to actual product flow.
C)Legal title passes when goods are delivered to common carrier.
D)Legal title passes when goods arrive at customer location.
E)Making sure goods in transit are properly accounted for.
Q3) The average days inventory for ATC (rounded) for 2018 is:
A) Less than 100 days.
B) 114 days.
C) 132 days.
D) 151 days.
Q4) What additional income tax payments did the 2014 liquidation cost SUPERVALU?
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Chapter 9: Inventories: Additional Issues
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Q1) In applying the lower of cost or market rule, the inventory of surgical supplies would be valued at:
A) $100.
B) $90.
C) $80.
D) $75.
Q2) Connors Academy reported inventory in the 2017 year-end balance sheet, using the FIFO method, as $154,000. In 2018, the company decided to change its inventory method to LIFO. If the company had used the LIFO method in 2017, the company estimates that ending inventory would have been in the range $130,000-$135,000. What adjustment would Connors make for this change in inventory method?
A) Debit Inventory for $21,500; Credit Cost of goods sold for $21,500.
B) Debit Retained earnings for $24,000; Credit Inventory for $24,000.
C) Debit Retained earnings for $19,000; Credit Cost of goods sold for $19,000.
D) No adjustment is necessary.
Q3) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to the total inventory.
Q4) Determine the inventory book value for Products A, B, and C.
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Chapter 10: Property, Plant, and Equipment and Intangible Assets: Acquisition
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Q1) On March 15, 2018, Ellis Corporation issued 5,000 shares of its no-par common stock in exchange for a patent. On the date of the transaction, the market price of the common stock was $22 per share. Ellis also received a tract of land from the City of Montrose as an enticement to build a new office building on the site. The land had a fair value of $510,000 and Ellis was required to pay only $200,000 to secure title to the land.
Required:
1. Prepare the journal entries to record the transactions under U.S. GAAP.
2. Prepare the entry to record the government grant assuming Ellis prepares its financial statements according to International Financial Reporting Standards. Prepare the entry according to each of the alternatives available under IFRS.
Q2) It's not unusual for one company to buy another company in order to obtain technology that the acquired company has developed or is in the process of developing. Required:
Explain the accounting treatment of purchased technology.
Q3) How are donated assets recorded?
Q4) Why would an oil company argue to use the full-cost method of accounting for oil and gas exploration costs?
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Chapter 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition
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Q1) According to International Financial Reporting Standards (IFRS), the impairment loss for an indefinite-life intangible asset other than goodwill is the difference between book value and the recoverable amount.
A)True
B)False
Q2) Comet Cleaning Co. reported the following on its December 31, 2018, balance sheet: Equipment (at cost) $3,000,000
In a disclosure note, Comet indicates that it uses straight-line depreciation over six years and estimates salvage value as 10% of cost. Comet's equipment averages 4.5 years at December 31, 2018.
Required: What is the book value of Comet's equipment at December 31, 2018?
Q3) Using the straight-line method, depreciation for 2018 would be:
A) $13,200.
B) $14,400.
C) $72,000.
D) None of these answer choices are correct.
Q4) Briefly explain how to account for a change in depreciation method.
Page 13
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Chapter 12: Investments
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Q1) Matrix, Inc., acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2018. The fair value and book value of 25% of Neo's identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2018 Neo recognized net income of $500,000 and paid dividends of $400,000. Neo had a total fair value of $10,000,000 as of December 31, 2018. Required:
(1.) Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix accounts for that investment as an equity method investment
(2.) Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix elects the fair-value option.
Q2) For trading securities, unrealized holding gains and losses are included in earnings:
A) Only at the end of the fiscal year.
B) On each reporting date.
C) Only when they exceed 10% of the underlying investment.
D) Based on a vote of the board of directors.
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Chapter 13: Current Liabilities and Contingencies
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Q1) Current liabilities normally are recorded at their:
A) Present value.
B) Cost.
C) Maturity amount.
D) Expected value.
Q2) Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:
A) Matching.
B) Consistency.
C) Materiality.
D) Conservatism.
Q3) Identify and define the three classifications prescribed by GAAP regarding accounting for contingencies to identify the range of possibilities for the likelihood of a confirming event for contingent liabilities. Describe the accounting action to be taken for each term.
Q4) Unlike the Social Security tax there is no maximum wage base for the Medicare portion of the FICA tax.
A)True
B)False
Page 15
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Chapter 14: Bonds and Long-Term Notes
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Q1) When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:
A) Remains constant.
B) Is equal to the change in book value.
C) Increases.
D) Decreases.
Q2) Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:
A) Face amount price less any unamortized discount or plus any unamortized premium.
B) Current bond market price.
C) Face amount less any unamortized premium or plus any unamortized discount.
D) Face amount less accrued interest since the last interest payment date.
Q3) Required: What total interest expense will Morton Sales Co. report over the 10-year life of these bonds?
Q4) Bonds will sell for a premium when the market rate of interest exceeds their stated rate.
A)True
B)False
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Page 16
Chapter 15: Leases
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Q1) Is it possible that a finance lease under IFRS be classified as an operating lease under U.S. GAAP? Explain.
Q2) You and a colleague are reviewing a prospective lease transaction for your employer, Ma and Pa Kettle's (MPK). Having heard of the new lease accounting standard update, your CFO has assigned you the task of assessing the impact of the lease transactions on the company's financial statements. The terms are these: At the beginning of its fiscal year, MPK would lease restaurant space from Wilson Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year. The building was acquired last week by Wilson at a cost of $300,000 and is expected to have a useful life of 25 years with no residual value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments.
Required: What will be the effect of the lease on MPK's earnings for the first year, and on the balance sheet at the end of the year (ignore taxes)? Journal entries are not required but might be helpful in your assessment. Round your answers to the nearest whole dollar amounts.
Q3) Briefly describe the conceptual basis for asset and liability recognition under the right-of-use approach used by the lessee in a lease transaction.
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Chapter 16: Accounting for Income Taxes
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Q1) Prepaid expenses, tax deductible when paid.
A)L
B)N
C)A
Q2) A temporary difference originates in one period and reverses, or turns around, in one or more later periods.
A)True
B)False
Q3) What events create permanent differences between accounting income and taxable income? What effect do these events have on the determination of income taxes payable and deferred income taxes?
Q4) At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will be recognized in the income statement in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:
A) Noncurrent deferred tax liability.
B) Noncurrent deferred tax asset.
C) Current deferred tax liability.
D) Current deferred tax asset.
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) Bernard Corporation has an unfunded postretirement health care benefit plan. Life insurance and medical care benefits are provided to employees who render 12 years of service and attain age 55 while in service to the company. At the end of 2018, Teri Clark is 35. She was hired by Bernard five years ago at age 30 and is expected to retire at the age of 62. The expected postretirement benefit obligation for Teri is $50,000 at the end of 2018 and $60,000 at the end of 2019.
Required:
Calculate the accumulated postretirement benefit obligation at the end of 2018 and 2019 and the service cost for 2018 and 2019 pertaining to Teri.
Q2) The key elements of a defined benefit pension plan include all of the following except:
A) The pension expense.
B) The plan assets.
C) Amortized future benefits.
D) The employer's obligation.
Q3) What is different about the expected postretirement benefit obligation and the accumulated postretirement benefit obligation?
Q4) What are the five components of postretirement benefit expense?
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Page 19
Chapter 18: Shareholders Equity
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Q1) When stock is issued for consideration other than cash, what is the measurement objective?
Q2) When preferred stock is purchased by the issuing corporation at a price below the original issue price and the stock is retired, the transaction:
A) Increases net income for the year.
B) Increases retained earnings.
C) Increases revenue for the year.
D) Increases paid-in capital--share repurchase.
Q3) Retained earnings might be reduced by each of the following except:
A) stock split not effected in the form of a stock dividend.
B) property dividend.
C) treasury stock.
D) cash dividend.
Q4) Share issue cost
A)May be increased when net income increases.
B)A feature of preferred stock.
C)May be reduced when shares are retired.
D)Designed to increase the market value of stock.
E)Reduces the net proceeds from selling shares.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2018, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market value of $6 per share on the date the award is granted.
Required:
(1.) Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares.
(2.) Prepare the appropriate journal entries related to the restricted stock through December 31, 2019.
Q2) If restricted stock is forfeited because an employee leaves the company, the appropriate accounting procedure is to:
A) Reverse related entries previously made.
B) Do nothing.
C) Prepare correcting entries.
D) Record an income item.
Q3) How is a complex capital structure different from a simple capital structure?
Q4) What is the "if converted method"?
Q5) What is an antidilutive security?
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Chapter 20: Accounting Changes and Error Corrections
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Q1) Diversified Systems, Inc., reports consolidated financial statements this year in place of statements of individual companies reported in previous years. This results in:
A) An accounting change that should be reported prospectively.
B) An accounting change that should be reported by restating the financial statements of all prior periods presented.
C) A correction of an error.
D) Neither an accounting change nor a correction of an error.
Q2) National Hoopla Company switches from sum-of-the-years' digits depreciation to straight-line depreciation. As a result:
A) Current income tax payable increases.
B) The cumulative effect decreases current period earnings.
C) Prior periods' financial statements are restated.
D) None of these answer choices are correct.
Q3) Describe in detail the way companies report most voluntary changes in accounting principle.
Q4) What is the difference between U.S. GAAP and IFRS with regard to the correction of accounting errors?
Q5) How may accounting changes detract from accounting information?
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Chapter 21: The Statement of Cash Flows Revisited
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Q1) Each year, White Mountain Enterprises (WME) prepares a reconciliation schedule that compares its income statement with its statement of cash flows on both the direct and indirect method bases. In its 2018 income statement, WME reported $440,000 for the cost of goods sold. WME paid inventory suppliers $380,000 in 2018, and its inventory balance decreased by $41,000 during the year. In its reconciliation schedule, WME should:
A) Show a $19,000 positive adjustment to net income under the indirect method for the increase in accounts payable.
B) Show a $19,000 positive adjustment to net income under the indirect method for the decrease in accounts payable.
C) Show a $19,000 negative adjustment to net income under the indirect method for the increase in accounts payable.
D) Show a $19,000 negative adjustment to net income under the indirect method for the decrease in accounts payable.
Q2) Explain why Sisters Corporation subtracts equity income from its net income in its measurement of cash flows.
Q3) Why is the statement of cash flows required as part of the set of external financial statements?
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